Monetary Policy
The actions of a central bank, currency board or other
regulatory committee that determine the size and rate of growth of
the money supply, which in turn affects interest rates. Monetary
policy is maintained through actions such as increasing the
interest rate, or changing the amount of money banks need to keep
in the vault (bank reserves).Economicstrategychosen by
agovernmentin deciding expansion orcontractionin
thecountry'smoney-supply.Appliedusually through thecentral bank,
amonetarypolicy employs three majortools:
(1)Buyingorsellingnational debt, (2) Changingcreditrestrictions,
and (3) Changing theinterest ratesby changingreserve
requirements.
Monetary policy plays the dominantroleincontrolof
theaggregate-demandand, byextension, ofinflationin aneconomy.
Alsocalledmonetary regime The experience of the State Bank of
Pakistan (SBP) in conducting the monetary policy of the country
over the years comprises a whole range of regimes. While the
overall objectives of monetary policy have remained the same,
policy contents intermediate targets, choice of instruments and
controls etc. have varied considerably over the years.
Monetary Policy 1972-88 Monetary policy during this period was
characterized by: (1) Creation of National Credit Consultative
Council (NCCC) and Annual Credit Plan, 1972 (2) Regimes of credit
ceilings with effect from October 1973 3) Directed, concessionary
and mandatory credit targets 4) Targets for fixed investment and
exports (5) Control on bank deposits and lending rates
The table below shows economic growth, monetary expansion and
changes in prices, during 1972-88. Table-4: Inflationary Gap
1972-1988 (in percentage) End June Consumer Price Index (CPI)
Monetary Growth GDP Growth (fc) Inflationary Gap
(a) (b) (c) (b-c)
1972 4.7 3.6 2.1 1.5
1973 9.7 22.7 6.7 16.0
1974 30.0 13.3 7.0 6.3
1975 26.7 7.8 3.3 4.5
1976 11.7 25.9 3.4 22.5
1977 11.8 24.3 2.8 21.5
1978 7.8 23.0 7.8 15.2
1979 6.6 23.5 5.6 17.9
1980 10.7 17.6 6.9 10.7
1981 12.4 13.2 6.2 7.0
1982 11.1 11.4 7.6 3.8
1983 4.7 25.3 6.8 18.5
1984 7.3 11.8 4.0 7.8
1985 5.7 12.6 8.7 3.9
1986 4.4 14.8 6.4 8.4
1987 3.6 13.7 5.8 7.9
1988 6.3 12.3 6.4 5.9
Average 10.3 16.3 5.7 10.6
